Many people don’t realize that Uncle Sam has an interest in their divorce, both in terms of how assets are divided and, specifically in the case of divorcing parents, in terms of how parenting time is shared. Tax laws that come into play in divorce are far too nuanced and complex to fully address here, but there are a few notable provisions of the tax code to keep in mind if you have children.
A bit of background: Whether you file your taxes as a married couple or as divorced individuals is determined by the date your divorce is finalized. If your divorce is not finalized before the end of the year, you will file your taxes as a married couple (married filing jointly or married filing separately). If your divorce is finalized before the end of the year (assuming you have not remarried), your filing status will be either single or head of household (HOH). HOH is generally the more desirable filing status, as it comes with more tax benefits. But there are certain requirements that must be met to use this filing status. To file HOH, among other things, a parent must have had the child for more overnights during the tax year than the other parent. If overnights are equal (and the other requirements for filing HOH are met), HOH status will go to the parent with the higher adjusted gross income (AGI). And, while an HOH parent can waive certain benefits and award them to the single parent, there are some benefits that go along with HOH status that cannot be waived.
One benefit that goes to the HOH filer and cannot be waived is the child and dependent care credit. This credit is for expenses the parent paid for care for a child under age 13 to enable the parent to work or look for work. Parents whose divorce will be finalized in 2021 should take special note of this credit, as the American Rescue Plan Act of 2021 (“the Act”) has significantly expanded it for the tax year 2021. The maximum amount of the credit has increased from $1,050 for one child and $2,100 for two or more children to $4,000 for one child and $8,000 for two or more children. The credit, which is generally not refundable, is fully refundable for 2021. Note that your eligibility for the credit may be affected if you use a dependent care FSA to pay for child care expenses.
A benefit that goes to the HOH filer that can be waived and awarded to the single filer is the child tax credit. This $2,000 partially refundable credit for children up to age 16 generally has an income phaseout beginning at $200,000 for both HOH and single filers. This means that, if you are an HOH or single filer and your AGI is under $200,000, you are eligible for the full credit, but if your AGI is higher than $200,000, the credit is reduced and eventually, at higher incomes, phased out. The Act expanded the credit for 2021 (up to $3,600 for children under age 6 and up to $3,000 for children ages 6-17) and made it fully refundable, but the income phaseout threshold is lower ($75,000 for single filers and $112,500 for HOH filers). However, the $2,000 credit may still be available for parents who income is too high to qualify for the enhanced credit. For example, a single filer who makes $95,000 in 2021 would be eligible for the original $2,000 credit, but might be phased out of the enhanced credit, whereas an HOH filer making $95,000 in 2021 would be eligible for the enhanced amount. One other notable item with respect to the 2021 child tax credit is that the IRS is making half of the credit available in advance, via monthly payments from July 2021 to December 2021.
Divorce can be complex, but a Collaborative Divorce team can help guide you through the legal, financial and emotional implications with dignity and respect.
Please note, the above is intended for educational purposes only and is not intended to be a substitute for legal, financial or tax advice.